Variable Rate Increase
March 2, 2022
Bank of Canada has raised their overnight rate by 0.25%, bringing it to .50%. Which for most lenders will likely increase their Prime rate to 2.70% from the previous 2.45%.
This change will have an impact on those with a Variable Rate Mortgage or Home Equity Line of Credit. It will mean a $13 a month payment increase for every $100,000.
Those with a fixed rate mortgage won't be affected by raising rates until they come up for renewal.
What is the Bank of Canada Overnight Rate?
The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market.
The Bank of Canada holds this Key Lending rate. They might lower it to encourage borrowing and spending OR they may increase it to curb inflation and debt levels.
Major lenders typically raise their prime rate when there is a hike. Thats the number they use to set interest rates for loans and mortgages.
Unlike a fixed rate where one is locked in to their rate, those in a variable rate will be affected by these changes. Home owners with fixed rate mortgages won't be affected until they have to renew.
Should I lock into a Fixed Rate now?
Historically variable rates have shown to save you more money in the long run.
A few things you should consider before locking into a Fixed rate is:
Are you planning to sell your home within the next 3yrs? Then we would highly recommend you stay in your variable rate mortgage.
Can your budget handle a payment increase if rates go up?
Will you be putting extra money down on your mortgage each month? If so, the savings from a variable rate can help you pay down your mortgage faster.
If you are considering locking in, give us a call to discuss first. We have a fun little calculator to help you forecast your savings if you decide to stay with your variable rate.
Source; Altrua Financial - Brent Richardson
When considering a rate lock in, it’s important to keep in mind that current fixed rates range between 2.6% – 3.1%. Over the past year, the fixed rates have already risen to price in the anticipated increase by the Bank of Canada/ Variable rates. Fixed rates are not priced directly by the Central Bank, they are priced based on Government of Canada Bond yields. To learn more on how fixed rates work, check out our ‘Understanding Fixed Rates’ podcast.
If your current variable rate is prime minus 1%, then you are currently at 1.45%. This means that a 1% central bank increase would put you at 2.45% and a 1.5% increase would put you at 2.95%.
While there is a chance that rate could increase higher than 1.5%, it is less likely as we approach that higher range and any increase above 1.5% is likely only to be shorter term, primarily to reduce inflation.
In other words, do you want to lock in 1.5% worth of rate increases now, with a fixed rate? Or wait for a year or so for the rate to come up on its own with the variable rate?
If you’re worried that the rate could increase higher than 2% then it can be worth locking into a fixed rate, mainly for peace of mind.
One excellent strategy is to make extra pre-payments in anticipation of higher rates, to take advantage of the current lower rate and get ahead on mortgage principal. Then as rates increase, you can reduce the increased payment later in the year
But the questions now are, what will higher rates look like and how should we best prepare?
We will see variable rates increase by 0.75% to 1.5%.
If inflation is still a major concern after these substantial increases, then we could see even higher rates until inflation is settled.
However we can already see compelling forecasts in the financial markets that Bank of Canada rates should fall again in 2-3 years. In other words, it looks like the Bank of Canada will be increasing rates more substantially to slow inflation, and then once inflation is under control it is likely that rates will drop.
We are not expecting rates to fall to current low emergency levels, but more of a normal rate which is likely to be about 0.75% – 1% higher then they are currently.